Exchanges stranglehold on data costs stifling market activity

Innovation has been slow to overcome the monopolistic hold exchanges have on market data fees, which threatens to stifle trading activity for smaller firms.

The monopolistic dominance exchanges have on market data costs has stifled market activity for certain buy-side firms, according to panellists at the FIA IDX conference.

Market participants have grown increasingly frustrated at rising exchange-led data costs, as they struggle to keep up with a welter of new regulations dictating data use.

Many believe exchanges have indulged in monopolistic practices by ramping up data fees, as well as introducing complex and strict new data licensing measures.

“In terms of the data costs, they do not rise uniformly, they come in waves. This results in an inflationary effect. You have internal infrastructure costs, but this combined with the inelastic demand for data causes end-user costs to increase,” said Will Cowling, exchange market data strategy, UBS.

Jork Muijres, product developer at Transtrend B.V, a Dutch-based asset manager, explained his firm’s data fees amounted to €3 million last year, with costs rising 30% over 12 months.

The impact this having on smaller sized firms could be detrimental to market activity.

“Our concern is for some of the exchanges, and the smaller exchanges, you only trade one or two contracts but you pay large amounts to gain access to data. The danger I see is if people have to pay this price for data, will they be willing to continue trading there? I don’t think so. For small to mid-sized CTAs, what could happen is less individuals active in the market,” said Muijres.

To mitigate these rising costs innovation is needed, however the pace of innovation has been slow and ineffective.

“There would have to be innovation to get around the licenses around data held by the big monopolies. You are not going to find a way to not pay that cost,” said Alan McGroarty, CEO, Tower Research Capital Europe.

“Exchanges are the custodians of liquidity, if they want to generate increased returns, data is an easy target. Someone is always going to get it in the neck when a rate changes. Maybe with the clearing changes we will see more distribution of derivatives.”